Letter of initial engagement – Where the rubber hits the road

Most financial planners provide a substantial amount of free time and expertise in the early stages of the advice process for prospective clients, but at some point the conversation will need to turn to the inevitable question of what advice will be provided and how much it will cost.

The letter of initial engagement (LOIE) is the written contract that provides for this agreement and, for many financial planning businesses, this document and the conversation around it will be the difference between successfully onboarding a new client or not.

ASIC provides little guidance as to what should be in an LOIE. RG168 discusses ‘good disclosure principles’ but these are aimed more at the financial services guide (FSG), product disclosure statement (PDS) and statement of advice (SOA).

The Financial Planning Association (FPA) provides detailed information around a client engagement letter for ongoing advice but not for the initial advice document.

The danger for many advisers is that all the hard work given away for free in the first meeting may be wasted if the LOIE is badly designed, little more than a templated legal document, inserted with the client’s name and a fee.

Here are five considerations for your LOIE:

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The document should be a seamless continuation of the new client onboarding process and the conversations that have taken place. In this way the client is engaged in a journey that is rational and informative and is taken to a logical conclusion – i.e. signing onto your service.

The LOIE should be a highly personalised document capturing the essence of the client’s goals and the agreed scope of advice within the text of the letter. In this way you can re-enforce the value proposal that is the client’s reason for proceeding.

Clients have no way of knowing the amount of time and effort that is undertaken by you and your team and this is an opportunity to outline the depth and breadth of the services that you are providing. These may include:

an in-depth understanding of their current financial position, concerns and goals;

determining gaps in achieving goals;

developing strategies to fill those gaps;

recommending financial products; and

implementing advice and providing an ongoing service.

The pricing mechanism can then be applied to these service levels allowing you to charge for each individual service across all six areas of advice. By pricing it this way, you can provide better transparency of your fee structure and align your fees more closely with the work conducted, ensuring that you don’t under-price your services.

A phased approach mechanism should also be outlined in the document as this can spread the burden of cost for the client, as well as the complexity. Some strategies may be dependent on other strategies to be successfully completed e.g. refinancing debt to free up surplus funds for a savings plan.

An adviser who takes the time to structure their client engagement process and provide a personalised LOIE should see the benefits across their business. More prospects are likely to become clients, as they will have a better understanding of the services they are agreeing to and therefore be willing to pay a commensurate fee. The practice should also have fewer compliance issues as the agreement between client and adviser is linked to the important conversations along the client journey.

This process can be simplified by using technology that transfers the relevant information through a series of tools providing a logical progression for the client and a simple sequence of events for the adviser. The letter of initial engagement can then be created through a wizard in a matter of minutes.